Professional Forum Paying People to Lie: the Truth about the Budgeting Process
Michael C. Jensen*
The Monitor Group and Harvard Business School e-mail: [email protected]

This paper analyzes the counterproductive effects associated with using budgets or
targets in an organisation’s performance measurement and compensation systems.
Paying people on the basis of how their performance relates to a budget or target
causes people to game the system and in doing so to destroy value in two main ways.‘
a ) both superiors and subordinates lie in the formulation ofbudgets and, therefore, gut
the budgeting process ofthe critical unbiased information that is required to coordinate
the activities ofdisparate parts of’an organisation, and { b ) they game the realisation of
the budgets or targets and in doing so destroy value for their organisations. Although
most managers and analysts understand that budget gaming is widespread, few
understand the huge costs it imposes on organisations and how to lower them.
M y purpose in this paper is to explain exactly how this happens and how managers and
firms can stop this counter-productive cycle. The key lies not in destroying the budgeting
systems, but in changing the way organisations pay people. In particular to stop this
highly counter-productive behaviour we must stop using budgets or targets in the
compensation formulas and promotion systems for employees and managers. This
means taking all kinks, discontinuities and non-linearities out of the pay-for-performance
profile of” each employee and manager. Such purely linear compensation formulas
provide no incentives to lie, or to withhold and distort information, or to game the system.
While the evidence on the costs of” these systems is not extensive, I believe that solving
the problems could easily result in large productivity and value increases – sometimes as
much as 50-Ioo% improvements in productivity. I believe the less intensive reliance
on such budget/target systems is an important cause of” the increased productivity of
Thanks to Joe Fuller, Nancy Nichols, Jennifer Lacks-Kaplan, Pat Meredith, Roger Marten,
Shibanee Verma, and Susanne Greenberg from Monitor, the editors of the Harvard Business
Review, and Michael Gibbs and Edwin Locke for their contributions to this piece. An executive
summary of this paper entitled ‘Corporate budgeting is broken – let’s fix it’ was published in the
Harvard Business Review, November 2001. An early version of this paper was given at the EF MA
Meetings in Athens, Greece in June 2001 before the wave of corporate scandals including Enron,
Worldcom and others. Because the paper is fully consistent with these later events I found little
reason to update it to include these more notorious examples of the phenomena.
Jensen, 2003. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 ZDQ, UK and 350 Main Street, Malden, MA

Abstract This paper analyzes the counterproductive effects associated with using budgets or targets in an organisation’s performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to game the system and in doing so to destroy value in two main ways: (a) both superiors and subordinates lie in the formulation of budgets and, therefore, gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organisation, and (b) they game the realisation of the budgets or targets and in doing so destroy value for their organisations. Although most managers and analysts understand that budget gaming is widespread, few understand the huge costs it imposes on organisations and how to lower them. My purpose in this paper is to explain exactly how this happens and how managers and firms can stop this counter-productive cycle. The key lies not in destroying the budgeting systems, but in changing the way organisations pay people. In particular to stop this highly counter-productive behaviour we must stop using budgets or targets in the compensation formulas and promotion systems for employees and managers. This means taking all kinks, discontinuities and non-linearities out of the pay-for-performance profile of each employee and manager. Such purely linear compensation formulas provide no incentives to lie, or to withhold and distort information, or to game the system. While the evidence on the costs of these systems is not extensive, I believe that solving the problems could easily result in large productivity and value increases – sometimes as much as 50–100% improvements in productivity. I believe the less intensive reliance on such budget/target systems is an important cause of the increased productivity of
* Thanks to Joe Fuller, Nancy Nichols, Jennifer Lacks-Kaplan, Pat Meredith, Roger Marten, Shibanee Verma, and Susanne Greenberg from Monitor, the editors of the Harvard Business Review, and Michael Gibbs and Edwin Locke for their contributions to this piece. An executive summary of this paper entitled ‘Corporate budgeting is broken – let’s fix it’ was published in the Harvard Business Review, November 2001. An early version of this paper was given at the EFMA Meetings in Athens, Greece in June 2001 before the wave of corporate scandals including Enron, Worldcom and others. Because the paper is fully consistent with these later events I found little reason to update it to include these more notorious examples of the phenomena.
# Michael C. Jensen, 2003. Published by Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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entrepreneurial and LBO firms. Moreover, eliminating budget/target-induced gaming from the management system will eliminate one of the major forces leading to the general loss of integrity in organisations. People are taught to lie in these pervasive budgeting systems because if they tell the truth they often get punished and if they lie they get rewarded. Once taught to lie in this system people generally cannot help but extend that behaviour to all sorts of other relationships in the organisation. Keywords: budgeting; budgets; compensation; performance measurement; gaming; lying; loss of integrity; truthfulness; sandbagging; motivation; productivity; incentives; control systems; accounting irregularities; fraud; goldbricking; channel stuffing; cooking the books; managing earnings; managing the numbers. 1. Introduction Budgeting systems are ubiquitous. Long considered a necessary tool in managing a company, the budgeting process frequently consumes six months of management time in negotiations, planning, and target-setting. Such systems are intended to coordinate the activities of the units and motivate managers. They are used in simple organisations and in vast and complex enterprises. And yet, the reality is that almost every company in the world uses a budget or targetsetting system that rewards people for ignoring or destroying valuable information and punishes them for taking actions that benefit the company. These budget-based systems reward people for lying, and for lying about their lying, and punish them for telling the truth. These systems reward gaming while obfuscating the facts they are meant to summon: facts that are necessary to help managers make the necessary tradeoffs in allocating resources between projects, departments and initiatives. Most line managers realise that these processes are a joke. They go to a lot of meetings, scope the extent of their problems, submit budgets they know will be unacceptable, then scramble to redo budgets to reflect the new level of earnings stipulated by senior management who are, in turn, driven by the earnings game they are involved in with Wall Street analysts. Senior executives, knowing that they do not have enough specific information about their markets and their customers to actually argue on the merits of the case, instead use their position and negotiating power to simply insist on higher and higher targets in an effort to meet the analysts’ expectations. The example in Table 1 illustrates how this process plays out in many companies. What is more, everyone at every level is so wrapped up in their budget systems that even though most dislike the budgeting process and perceive the damaging effects of the behaviour it encourages, they cannot conceive of managing a company in any other way. Indeed companies that do without such budgeting systems run the risk of being considered poorly managed. The key to resolving these issues is not necessarily to throw out the budgeting process (although some would argue this is desirable),1 but
1 See Hope and Fraser (1997, 1999a, b, 2000), Kersnar (1999), Lester (2000) and Thomas (2000) which summarise the experiences of a number of mostly Scandinavian companies including Svenska Handelsbanken (Sweden’s largest bank which abandoned budgets in 1970), Air Liquide, SKF, Ericsson, Skania, Schlumberger, Skandia, Swedish Post, Tetrapak, Diageo, Borealis, Volvo Cars, IKEA, and Fokus Bank which have abandoned budgets or are in the process of doing so. The Consortium for Advanced Manufacturing International (CAM-I) has established a Beyond Budgeting Roundtable to understand and report on these developments.

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Table 1 Let the games begin: one company’s budget process. Gaming, wasted time, and poor decisions are rampant in most budget processes at most companies. Mid-May: The annual budgeting process begins. The chief financial officer and the chief strategy officer establish the overall after-tax net income target by working backwards from Wall Street analysts’ estimates and adjusting for known (but not disclosed) circumstances which would impact the coming year. This target is then reviewed with the CEO who informs the SBUs of the overall target. Early June: The head of each SBU prepares a preliminary forecast for the coming year with input from their business unit heads. The SBU challenge is to present a forecast that is not so ridiculous as to infuriate the CEO, but nevertheless has a high probability of being achieved. Late June: Not surprisingly, the sum of the SBU forecasts do not come close to the overall target and the SBUs spend the next month defending their forecasts and explaining why it is impossible to produce a higher net income. Early July: Patience wears thin and the CEO and SBU presidents begin to negotiate the allocation of the gap between the forecast and the overall target. This year, like every year, the SBU president who is the better negotiator is awarded a much smaller piece of the gap than the president who is not as good a negotiator. Late July: Once the SBU targets have been agreed upon, a similar process to set targets for the business units within the SBUs begins. After another month of presentations defending initial forecasts, the President mandates the allocation of the overall SBU target. The business units then spend the summer trying to figure out how to meet their targets. Much time is spent arguing over internal allocations since in many business units as much as 60% of expenses come from other departments. Again, this year there is more to be gained from beating down a colleague or from changing the method of allocation than from focusing on how to grow revenues or reduce those expenses under your control – a fact that is not lost on the participants, acrimony and politicking flourishes. Early September: In this environment it is, as usual, virtually impossible to agree on the funding of cross-organisational projects. One result is the creation of 14 different e-mail systems, none of which are compatible. The eventual cost to connect these systems so that the company can co-ordinate its services is a substantial portion of the $100 million project to connect the company’s business units. In September: the final negotiations begin. The SBUs present their business plan for the coming year to the senior management group (the CEO, CFO, CIO, CSO, HR, Legal, Risk). Each major business within the SBU presents the highlights of their business plan, (focusing on the reasons that they might not be able to meet the plan). The more convincing a business unit is, the more likely its plan would be adjusted downwards. From a business unit perspective the strongest lever in the negotiations is the deferral or cancellation of so called strategic projects for which expenses are heavily loaded to the near term and benefits are loaded to the sometimes distant future. Many of these strategic projects are, however, essential if the firm is to remain in the business over the longer term. For example, since the mid-1990s one SBU had known that for security reasons and to comply with international standards it had to re-engineer one of its products before 31 December 1999. For five years this ‘strategic project’ was put forward as a reason for reducing the division’s target and rejected, and thus never initiated. In 1998, the division incurred $30 million in fraud costs, about one-half of which could have been avoided, if it had implemented the project.
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Table 1 Continued.

In November: Top management presents the coming year’s budget to the Board of Directors and it is approved. The End Game: A comparison of five years of actual earnings versus planned earnings showed that the only number the company ever achieved was the net income number. Revenues and expenses were at least 10% over or under. Most often revenues did not meet targets and spending (usually R&D and investment spending) was cut to ensure that net income targets were met. Bonuses, however, were paid because they were directly linked to meeting the net income target.

to change the way we measure performance and the way we reward and punish people. Budget systems are based on the premise that managers should be rewarded for achieving their targets for the period and punished for missing them.2 What every manager knows, but most fail to pay attention to, is the effect that such systems have on incentives. Tell a manager that he or she will get a bonus when targets are realised and two things are sure to happen. First, managers will attempt to set targets that are easily reachable, and once the targets are set, they will do their best to see that the targets are met even if it damages the company to do so. Consider this example: managers at a heavy equipment manufacturer were so set on making their budget targets and assuring their bonuses that they shipped their unfinished industrial products from their plant in England all the way to the Netherlands (so they could realise the sales revenues early). At great cost and inconvenience, they finished assembling them in a warehouse close to their customer. By doing so, they booked the sale in the necessary quarter, made their bonus, but lowered their company’s profit overall. The budget had been met, the bonuses were assured, but the company was worse off for the effort. Examples like this are legion. Such gaming, however, is considered part of business life, so much so that it often takes on a life of its own. As in the example above, managers game the realisation of the targets. They also game the setting of targets in the first place. Both result in substantial damage to the company and lower its profits and value. How does this happen and what can we do about it? 2. Gaming the realization of targets A manager promised a $100,000 bonus for reaching this year’s target will go to great lengths to achieve it. Managers who run the risk of just missing the budget target will accelerate shipments and revenues from next year into this year and move expenses from this year to next year even though by doing so overall profits are reduced in the two years. Take the case where the manager loads the distribution channel with more
See Locke (2001), for an excellent review of goal setting and budgeting. Locke discusses the counter productive effects of paying people for meeting goals and suggests three solutions to these problems. I return to them below. Locke and Latham (1990) provide an excellent analysis of the theory and evidence on goal setting.
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product than it can handle because shipping the product allows realisation of the profit this year. Managers do this even though they expect the product will be returned next year, and even though they know it makes it even harder to make next year’s profit target. And it is not unusual for the gaming to turn fraudulent. In one case managers shipped fruit baskets that weighed exactly the same amount as their product and booked them as sales. In another case, Informix, an internet software company, and its auditor paid $142 million to settle lawsuits resulting from SEC charges for fraudulently increasing earnings by $295 million in the 1994–1997 period. In its complaint the SEC charged that managers and sales personnel attempting ‘to meet or exceed the company’s internal revenue and earnings goals’: 1. moved revenues from one quarter to the previous quarter by backdating sales agreements; 2. entered into secret side agreements granting rights to refunds and other concessions such as paying fictitious consulting or other fees to customers to refund their software license fees; 3. recognised revenue on transactions with reseller customers that were not creditworthy, 4. recognised amounts due under software maintenance agreements as software licensing revenues; and 5. recognised revenue on disputed claims against customers.3 Similarly Sabratek, a developer and seller of remote healthcare equipment has been sued for revenue enhancing fraud including the alleged sale of products to entities that had not ordered them, inventory parking arrangements, and widespread stuffing of the distribution channel.4 In another case the Wall Street Journal reported on 9 April 20015 that PricewaterhouseCoopers found that the Korean unit of Lernout & Hauspie Speech Products NV was found to have reported fictitious sales equal to 70% of its nearly $160 million in sales between September 1999 and June 2000. ‘In an effort to clinch rich bonuses tied to sales targets, the Korean unit’s managers used highly sophisticated schemes to fool L&H’s new management. One especially egregious method involved funneling bank loans through third parties to make it look as though customers had paid when in fact they hadn’t.’ One of the executives involved earned $25 million in sales target bonuses before being fired. L&H ‘one of Europe’s high-tech stars, filed for bankruptcy protection . . . after admitting to widespread accounting irregularities.’ And the news media6 has recently reported on questions of accounting

See ‘In the matter of Informix Corporation’, SEC Release No. 337788, 11 January 2000, http://www.sec.gov/litigation/admin/34-42326.htm. 4 See P. Larson (TMF Parlay), ‘Sabratek saga cliff notes’ FOOL PLATE SPECIAL: an investment opinion, August 26, 1999 http://www.fool.com/news/1999/foolplate990826. htm?ref ¼ newreg, (23 April 2001), and Herb Greenberg, ‘*update* amended lawsuit alleges accounting irregularities at Sabratek’, 15 June 1999, http://www.thestreet.com/comment/ herbonthestreet/756299.html (23 April 2001). 5 J. Carreyrou, ‘Lernout unit booked fictitious sales, says probe,’ Wall Street Journal, 9 April 2001, p. B2, and J. Carreyrou and M. Maremont, ‘Lernout unit engaged in massive fraud to fool auditors, new inquiry concludes’, Wall Street Journal, 6 April 2001, p. A3. 6 Reuters ‘Corporate accounting woes puts fund managers on alert’, 13 February 2001 http:// www.forbes.com/newswire/2001/02/13/rtr184059.html (23 April 2001).
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irregularities (a common manifestation of this gaming problem) in many well-known firms7 including Bankers Trust, Cendant,8 W. R. Grace, Livent, Sunbeam, Waste Management, Rent-Way9 Xerox10, Compaq,11 CISCO,12 Gillette,13 Kroger,14 Rite Aid,15 Computer Associates,16 and Lucent.17 The Wall Street Journal reports that about 40 of the SEC’s accounting-fraud investigations involve companies in the Fortune 500. Indeed, the SEC’s enforcement chief, Richard Walker, commenting on the magnitude of the problems said recently: ‘If we had nothing else to do, the accounting investigations alone could keep us busy for the next five or ten years. The size and magnitude are crushing’ (Schroeder, 2001).

See C. J. Loomis, ‘Lies, damned lies, and managed earnings’, Fortune, 2 August 1999. ‘Accounting: book cookers, beware! Audits are improving’, Fortune, 16 April 2000. 8 See ‘Cendant case scorecard: government 3; book-cookers 0’, Fortune, 10 July 2000. 9 See Queena Sook Kim, ‘Rent-way details improper bookkeeping: expenses were artificially cut by $127 million, report says’, Wall Street Journal, 8 June 2001, p. C1. 10 See Xerox Press Release, ‘Xerox releases details from independent investigation of Mexico accounting issues’, 1 February 2001, http://biz.yahoo.com/bw/010201/ct_xerox.html (23 April 2001). J. Bandler and J. Hechinger, ‘Xerox executive challenges its accounting and is fired – query into Mexican unit’s books snowballs’, Asian Wall Street Journal, 7 February 2001. Reuters ‘Update 1-Xerox accounting woes resurface, shares tumble’, 3 April 2001, http:// www.forbes.com/newswire/2001/04/03/rtr227376.html (23 April 2001). Reuters ‘Xerox hit with shareholder lawsuit’, 21 February 2001 http://www.forbes.com/newswire/2001/02/21/ rtr189312.html (23 April 2001). 11 G. Kelly and J. Ticehurst, ‘Compaq denies ‘‘channel stuffing’’ claim’, 12 December 2000, http://www.vnunet.com/News/1115296 (23 April 2001). 12 See A. Bary, ‘Half-point rate cut is worth 10% to the NASDAQ’, Barrons Online, 23 April 2001. 13 See D. Golden, ‘Gillette Co. misses estimates, citing excess inventories’, Wall Street Journal, 19 April 2001. ‘Chief financial officer Charles Cramb acknowledged that the company oversupplied batteries and older razor systems to retailers during the year-end holiday season and misread its market share, leaving it with trade inventory backlogs in excess of three weeks’. 14 See ‘Kroger Co. to restate results after finding improper accounting’, Wall Street Journal, 6 March 2001, p. B10. ‘Gary Rhodes, a spokesman for Kroger, said the restatements stem from ‘‘accounting entries that were made to manage Ralph’s earnings’’. In quarters for which actual results exceeded budget expectations, he said, some executives of Ralphs would inappropriately record the extra money in a variety of accounts instead of reporting it as income. . . . All of the executives who were directly involved in the questionable bookkeeping have left Ralphs in the past year, Mr. Rhodes added, and Kroger has reported the matter to the SEC’. 15 See M. Maremont, ‘Lawsuit details Rite Aid’s accounting woes’, Wall Street Journal, 28 February 2001, p. C1. 16 See A. Berneson, ‘A software company runs out of tricks’, NY Times, 29 April 2001, section 3, p. 1, and A. Berneson, ‘Computer associate officials defend accounting methods’, NY Times, 1 May 2001, section C, p. 1. 17 See D. J. Berman and R. Blumenstein, ‘Behind Lucent’s woes: push to meet high revenue goal’, Wall Street Journal, 29 March 2001. S. N. Mehta, ‘Lessons from the Lucent debacle’, Fortune, 5 February 2001. T. Murphy, ‘SEC continues Lucent probe’, 19 February 2001, http:// www.electronicnews.com/issue/RegisteredIssues/2001/02192001/z8f-1.asp, (23 April 2001). Reuters, ‘Chronology: key events in Lucent’s recent trouble’, 24 April 2001, http:// www.forbes.com/newswire/2001/04/24/rtr242259.html (24 April 2001).
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Years ago I witnessed top management of a durable goods manufacturing company with target-based bonuses struggling to reach their bonus targets before the year-end close of the books. In September they announced to their board and customers that product prices would increase 10% effective as of 2 January of the next year. Now it may well be that a price increase was the right action at this time for this firm. But it was not in line with competition at the time, nor was it very likely that 2 January, of all possible dates, was the optimal time for the increase. But, announcing an effective date of 2 January of course, would motivate the firm’s customers to order product in advance of their normal order cycle to avoid the price increase. This would thereby aid management in reaching the bonus level for the year – but at the expense of next year’s profits. Moreover, when it became clear in November that the firm would not reach the bonus targets management announced the largest quarterly loss in the history of the company. This is consistent with the notion that managers realising they will not meet this year’s targets, move revenues to next year and expenses from future years to the current year (write-offs) because it costs them nothing to do so in this year’s bonus and it makes it easier to reach targets in future years.

3. Gaming the setting of targets Managers have information that is important in setting their budget targets for next year. However, once a budget-target reward system is in place managers have no interest in seeing such information accurately incorporated in budget targets. Indeed, as Ichak Adizes so accurately summarised it in his 1989 book: ‘The more people lie about how much they cannot do, the more they are rewarded’. Being aware of this, superiors are then led to lie about how much their subordinates can do to counterbalance this bias. But now no one in the system has incentives to accurately estimate what the budgets should be, and at all levels information critical to the budget-setting process is hidden, destroyed or polluted. There are two major effects of this on companies. A. Budgets play a critical role in coordinating disparate parts of a company so that their actions lead to harmonious interactions, high output, low cost, high quality, low inventories and satisfied customers. But, once we establish a budget-targeting process that hides and destroys critical information regarding what various parts of the organisation can do and how they will do it, this critical coordinating role of budgets is severely hampered. Uncoordinated, chaotic actions that lead to high cost, low quality, missed opportunities, and dissatisfied customers are the result. B. Honesty and integrity are eroded throughout the organisation because once managers are taught that they must lie and conceal information to succeed in the budget-target game they soon begin to extend such out-of-integrity behaviour to all parts of an organisation’s management system and even its relationship to outside parties. The budget game inevitably gets extended to the firm’s relationship with the capital markets as the CEO and CFO become enmeshed in a game with financial analysts over meeting financial targets. ‘Managing the numbers’ as it is often called, is commonly considered part of every top managers job18 – along
18

For excellent discussions of this phenomenon, see (Collingwood, 2001; DeGeorge et al., 1999).

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with denying that this dishonest behaviour is going on. It shows up at the board of director’s level as management misleads the board, as the board endorses misleading reports to shareholders and other outside constituents, and as managers mislead customers, suppliers and employees about all sorts of important information about the state of the company. 4. Stopping the vicious cycle and restoring integrity I believe that almost no one in this system consciously believes he or she is lying or behaving without integrity. Indeed, in most corporate cultures much of this behaviour has become expected of responsible managers and board members. It is also undiscussable. To stop the gaming of budgets and targets and restore integrity to the planning and management process we must begin not by telling managers to stop lying, nor by eliminating the use of budgets, but by eliminating the use of budgets and targets in compensation formulas and promotion systems. Eliminating the use of targets or budgets in compensation systems solves the problem because if your bonus or promotion is a function of what you accomplish, not whether you meet or exceed a budget or target, you have no monetary incentive to hide information or lie in the budget/target-setting process. Budgets can be used for planning and coordinating as they were intended, and a major cause of the erosion of integrity in organizations is eliminated. A. Analysis of the fundamental sources of the incentives to game the system To see why this behavioural problem is a problem with the compensation system, not the budgeting system, let us structure the analysis a little more. We start by defining a pay-for-performance profile which plots the total compensation of an individual vs. his or her performance. Consider the fairly standard pay-for-performance profile in Figure 1.

Fig. 1. Typical pay-for-performance profile of an executive compensation scheme.
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Figure 1 illustrates the common practice in which a manager’s salary plus bonus is constant until a minimum hurdle performance is reached – commonly 80% of the targeted or budgeted performance level. For our purposes we need not specify what the measure of performance is, but it might be profits, sales, quantity of output or any number of other things including the growth rate of some measure. At about 80% of the budgeted performance the manager receives a bonus for making the hurdle target. This bonus can often be substantial, and as performance increases above this hurdle the bonus increases until it is capped at some maximum (120% of the budget or target is common). Performance above this upper limit generates no additional bonus. Consider managers’ incentives when they are struggling to reach the minimum hurdle. In this situation as long as they believe they can make the minimum, managers will engage in actions to increase the performance measure, and this can be done by legitimate or illegitimate means. When the measure is profits, or some variation of profits, managers have incentives to increase this year’s profits at the expense of future year’s profits by moving expenses from this year to the future (by delaying purchases, for example) or by moving revenues from future years into this year by booking orders early (as we described above by announcing future price increases, or by giving special discounts this year, or guaranteeing to repurchase goods in the future, and so on). When these actions simply move profits from one year to another the adverse impact on firm value is probably small. But, it can pay managers today, to engage in actions that reduce the total value of firm cash flows by moving profits to the current period even when future profits are dramatically reduced. Obviously policies that encourage long-term employment in a manager’s current job tend to reduce (but not eliminate) the incentives to beggar the future to boost the present-year bonus. When managers conclude that they cannot make the minimum hurdle, their incentives shift dramatically. Now they have incentives to do the opposite of what we just described, that is to move profits (if that is the performance measure) from the present to the future. They will do this by moving expenses from the future to the present period (by prepaying expenses, taking write-offs for restructuring, etc.), and by moving revenues from the present to the future.19 This is the big bath theory. As we can see from Figure 1 if the manager is going to miss the bonus this year anyway, there is no further reduction in compensation from performance that is even farther away from the lower hurdle amount (subject always to the condition that the manager is not fired). But moving future expenses to the present and current revenues to the future will increase the likelihood of a bonus in future years and increase the bonus amount at that time if they ar